Bloomberg News

Korea Companies Set to Keep Record Bond Sale Volumes in 2012

November 16, 2011

(Updates with Park’s comment on Kimchi bond alternatives in seventh paragraph.)

Nov. 16 (Bloomberg) -- South Korean companies, which raised a record from domestic bond sales this year, may keep up the pace in 2012 on demand from Japanese investors, according to top-ranked manager KB Investment & Securities Co.

Debt sales have risen 20 percent from last year’s total to 51.3 trillion won ($45 billion), surpassing the previous peak of 48 trillion won in 2009, according to data compiled by Bloomberg. Seoul-based KB Investment, a unit of the nation’s second-largest financial services group by assets, arranged 7.9 trillion won in sales, for a 16 percent share of the market.

Overseas investors increased holdings of Korean bonds by 91 percent in the first 10 months as Europe’s debt crisis and Standard & Poor’s downgrade of the U.S. credit rating made the Asian country’s debt more attractive. Japan has kept its target interest rate between zero and 0.1 percent since October 2010, as it seeks to stoke growth following a record earthquake.

“Overseas demand, especially from the Japanese, will be the fresh buying force that keeps the market growing,” Park Sung Won, deputy head of corporate finance at KB Investment, said in an interview in Seoul yesterday. “With the strong yen, almost zero interest rates in Japan and risks for European and U.S. debt, Japanese investors will turn to Korean corporate bonds for relatively high yields with reasonable risk.”

Kimchi Bonds

Overseas investors are buying more Korean corporate debt, raising their bond holdings to 581 billion won this year as of the end of October, according to data from Korea’s Financial Supervisory Service.

The government in July imposed restrictions on the volume of Kimchi bonds, leading to increased Japanese investor interest in won-denominated corporate bonds, Park said. Kimchi Bonds are foreign-currency denominated debt sold in South Korea by local or overseas companies.

“After the measure, Japanese investors are now directly looking into won-denominated bonds as alternatives to Kimchi bonds,” Park said. “It seems like they’ve become more willing to invest in Korean company debt, after seeing their earnings power improved even as economic conditions worsen globally.”

Japanese investors held 52 percent of outstanding Kimchi bonds, according to a July 19 statement from the Bank of Korea.

“From the Japanese investors’ perspective, they can gain from the higher yield on Korean credits,” Park said. “They’re attracted to the Korean corporate bonds because the countries’ industrial structures are similar.”

KB Investment is also the largest manager of Kimchi bond sales, arranging $909.8 million of debt, a 24 percent market share, Bloomberg data show.

‘Chasing Better Yields’

Japan’s 3-year domestic corporate bonds have yielded, on average, 41 basis points more than the benchmarks this year, according to the Bank of America Merrill Lynch index. Similar Korean securities had an average spread of 78 basis points through yesterday’s close, data from the Korea Financial Investment Association show.

“Investors can’t tolerate such low returns from sovereign debt and are chasing better yields, which makes debt at high- rated Korean companies attractive,” said Louis Shin, credit analyst at Woori Investment & Securities Co. “Japanese investors can also expect extra gains when the won appreciates, on top of the attractive yield.”

The won lost 13 percent against the yen in the third quarter, the worst performance among the 10 most traded Asian currencies tracked by Bloomberg. The currency, which weakened to 14.75 per yen at 2:04 p.m. in Seoul, is forecast to strengthen to 13.31 in 2012 and 11.93 in 2013, according to forecasts compiled by Bloomberg.

KB Investment plans to add four people to its 40-member corporate-finance team next year as it strives to keep its top ranking, Park said.

--Editors: Nathaniel Espino, Chitra Somayaji

To contact the reporter on this story: Taejin Park in Seoul tpark31@bloomberg.net Seonjin Cha in Seoul at scha2@bloomberg.net

To contact the editor responsible for this story: Shelley Smith at ssmith118@bloomberg.net Chitra Somayaji at csomayaji@bloomberg.net


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